Joint Committee on Finance and the Public Service Meeting 10 November, 2004. Opening Statement by Frank Daly, Chairman, Revenue Commissioners
Joint Committee on Finance and the Public Service
Meeting 10 November, 2004
Opening Statement by Frank Daly, Chairman, Revenue Commissioners
Chairman
Introduction
The Committee has invited me here today to discuss background, operation,
costs and numbers relating to the various schemes of tax reliefs and exemptions
and also relating to tax residency. I have already provided the Committee
with some factual briefing material.
With your permission Chairman, I will use this opening statement to elaborate a little on some aspects of the subject matter which may be the particular focus of the Committee’s interest.
Role and effect of investment incentive tax relief
There is little doubt that tax incentives, when properly focused, are
considered by Government to be an important tool in their ability to stimulate
investment in areas of the economy where such investment is deemed necessary.
This tool works because a common instinct of taxpayers is to seek to reduce their tax liabilities - it is easy to understand this instinct. Governments worldwide have sought to harness it so that it is productively directed towards improving the levels of investment in under developed and under resourced areas of their economies and societies. The underlying economic theory is that such incentives increase the after-tax return on investments which, although desirable and valuable from a broader (societal) perspective, would be unattractive to individual investors without the tax incentive.
Decisions in this area therefore are essentially economic and socio-political rather than specifically inherent to the operation of the tax system.
In Ireland the use of tax incentives to encourage particular types of activities or to channel investment in a particular direction has been a feature of our taxation system under successive Governments since the 1950s. And I think there would be little argument that in general the availability of most of these incentives has led to economic activity that otherwise either would not have occurred at all, or would not have occurred at the same pace or would not have occurred in the desired areas and sectors .
Income exemption approach
In the early days the general approach taken was focused on income exemption.
The reliefs generally provided for the exemption of income from a particular
source such as Export Sales Relief (ESR) and patent income. Some of these
were by any measure very successful - few will argue about the effectiveness
of ESR in the modernisation of Irish industry during the 60s and 70s.
Investment-based relief
Over time the income exemption approach to tax relief evolved and was
joined by the investment-based approach.
Initially these investment-based reliefs were in essence merely the bringing forward of otherwise available allowances and reliefs for capital expenditure on industrial buildings, plant and machinery and hotels. Most accountants would assert that these reliefs were no more than an integral part of the cost of the economic activity of the business.
In the early 1980s the first relief which was based on a deduction for capital expenditure that otherwise would not be allowable - and doing so in a manner that resulted in no claw-back if the asset was held for a shorter period than its expected useful life - was introduced. This was Section 23 relief - introduced at a time when the building trade was in a slump. At the same time a first time buyers’ grant was introduced to encourage the building of new houses and apartments. There was a dramatic turnaround in the house building industry that’s generally acknowledged as having a positive correlation with the introduction of these two provisions.
Other property-based incentives have of course been introduced since and right now reliefs and incentives in Ireland take a number of forms and have different, and sometimes numerous, objectives.
I have given the Committee a listing of the main reliefs and incentives currently available and I have given you, where these are available, the costs and the numbers availing of these reliefs.
I should emphasise that the range of reliefs is such that they are of benefit to a very wide spectrum of taxpayers as will be evident if I mention the major ones:
- Exemption of child benefit from income tax;
- Capital allowances, the bulk of which are normal business capital allowances in lieu of depreciation;
- Employee and Employer pension costs reliefs - these are very widely availed of;
- Exemption from capital gains on the sale of one’s principal private residence;
- Special savings Investment Accounts which are availed of by over a million taxpayers;
- Mortgage Interest relief, and Medical Insurance and health expenses relief.
Costing of reliefs
I have also briefed the Committee on why many reliefs and incentives are
not currently costed and I’d like to expand on that a little.
Firstly let me acknowledge that tax reliefs and incentives do represent a significant overall cost to the Exchequer and of course they narrow the tax base. It is therefore essential that they be subject to on-going review and the availability of figures for the tax cost of these reliefs is one essential ingredient for such reviews.
The tax costs of many reliefs however has always been difficult to determine accurately due mainly to the absence of detailed and specific information. The current availability of cost and other information on individual schemes varies considerably and it is ascertained in a number of ways - either through tax returns; through the separate claims mechanisms used; or through estimation from data available from other (sometimes non-Revenue) sources.
Even so there are many areas where information is not available and where we acknowledge it’s past time that it should be.
Prime examples are the pensions area and the area of capital allowances.
What are we doing?
As outlined in the written brief to the Committee, Revenue and the Department
of Finance have been working closely together recently to investigate
information and data capture issues with a view to improving data quality
and transparency. We are however trying to do this without overburdening
compliant taxpayers and with minimal impact on Revenue’s ongoing
strategy to keep compliance costs as low as possible and simplify forms,
procedures and regulations.
We are therefore introducing a number of changes to tax returns which will yield additional information regarding the tax costs of various reliefs and incentives and also relief in relation to pensions. The additional information will be first captured in 2004 tax returns which become due late in 2005. Preliminary analysis for some categories will become available in early 2006.
I have given the Committee a full listing of about 25 reliefs in respect of which we will collect additional information. This does not cover every possible relief but we have decided to focus on those tax expenditures for which the availability of cost information would make a contribution to evaluation and policy making that would justify the additional burden of collecting the information.
We will continue to keep this matter under review.
It would indeed be Revenue’s view that as a matter of general policy any new relief or incentive schemes should require that the credit or amount be separately identified by the claimant. It is also a fact that ongoing IT developments in Revenue will facilitate greater data capture in future without significant added burden on taxpayers.
I must draw the Committee’s attention to the fact that despite our best efforts, this does mean that tax forms will necessarily be longer and I expect some complaints about this. Where the administrative burden on business is increased this Committee may also receive such complaints.
Property-based capital allowances
As there has been quite some comment on property based capital allowances
I would like to refer for the Committee’s information to two aspects
of those allowances - restrictions which have been applied and termination
dates.
Restrictions applied to property based allowances
Finance Act, 1998 imposed restrictions on the set off of excess capital
allowances by passive individual investors, generally lessors, against
income other than rental income. A passive individual investor is now
only entitled to set off excess capital allowances of €31,750 against
his or her non-rental income. The restriction applies to all capital
allowances due on construction/refurbishment expenditure on industrial
and commercial properties excluding hotels, holiday camps and holiday
cottages.
The same Finance Act also restricted the set off of excess capital allowances available to passive individual investors in certain hotels (apart from those in North West Counties) and holiday camps. A passive individual investor is only allowed set excess capital allowances against other rental income i.e. there is no set off against non-rental income.
While these restrictions were introduced in 1998 they only apply, subject to the transitional provisions, to construction/refurbishment expenditure incurred after 3 December, 1997. Capital allowances due in respect of expenditure before that date or that come within the transitional provisions are not subject to these restrictions. Therefore unrestricted capital allowances are still available in respect of qualifying expenditure.
Finance Act, 1992 restricted the set off of capital allowances available in respect of expenditure on holiday cottages. Subject to certain transitional provisions the restrictions applied to expenditure incurred after 24 April 1992.
It is important to note that many investors do have substantial rental income and are still in a position to make substantial use of the capital allowances available.
Termination dates of schemes
Most of the current incentive area schemes are due to finish on 31 December,
2004 subject to transitional provisions that extend that date to 31 July
2006. The termination dates relate to the date by which expenditure must
be incurred on a property in order to qualify for capital allowances.
Therefore while capital allowances will not be due in respect of expenditure
incurred after the termination dates they will continue to be due in respect
of expenditure incurred prior to those dates.
For example if a project has met the transitional provisions so that the qualifying period is 31 July, 2006, if qualifying expenditure of €10 million was incurred before 31 July, 2006 and the property is brought into use before the end of the tax year 2006, allowances could continue to be claimed as follows:
| Tax Year | Capital Allowances claimed |
|---|---|
| 2006 |
Initial allowance 50% of €10m = €5m |
| 2007 - 2020 |
Annual allowances of 4% p.a. i.e. €400,000
p.a. for 12 years and balance in 13th year. |
Residence
I have given the Committee detailed briefing on the somewhat complex set
of rules that apply to residency and domicile for tax purposes. In this
statement I have nothing more to add except perhaps to clarify that there
is no such thing as a Revenue list of Irish citizens who are tax exiles.
Tax returns did not historically request data on citizenship as the question
of whether or not a person is an Irish citizen has no general relevance
for tax purposes. There are considerable numbers of Irish citizens living
abroad who make tax returns to Revenue in respect of income earned here
(e.g. rental of houses etc.).
However Revenue has a general entitlement to make all relevant enquiries in regard to any tax return or statement made to them and, where appropriate, to carry out an audit to verify the accuracy of the return or statement. This applies in exactly the same way to returns or statements made by people claiming to be non- resident as it does for all other taxpayers.
All Revenue’s interventions whether they be audit or special compliance enquiries are made on the basis of indicators of risk. The status of claims to non-residence is included in risk profiling and I can assure the Committee that this is an area to which we pay special attention. We have access to a variety of sources which can assist us if we deem it necessary to make verification checks on claims to non-residency for any individual or any particular period of time.
I should say that there are no indications at this time that Irish domiciled persons who claim non-residence are unable to demonstrate that they were outside the State for the requisite 183 days. Awareness of Revenue’s general interest and audit programme in this area, together with the financial consequences of non-compliance certainly seems to motivate these individuals to keep their residence patterns within the rules.
High Worth individuals
There has been much comment in recent days about information provided
in response to a Parliamentary Question which indicated that a small number
of people (11 in all) with gross incomes exceeding €1 million had
no net liability to tax in the tax year 2001.
I should mention that it was also indicated that of those in the PAYE sector who earned €100,000 or more, less than one half of one percent (0.4%) had a nil net income tax liability, less than one half of one percent (0.4%) had a net liability at the standard or marginal relief rates and over ninety nine percent (99.2%) had a liability at the higher rate. The comparable figures for the self employed were 2.1% with a net nil liability, 1.2% with a net standard rate liability and 96.7% had a liability at the higher rate.
It may be useful to indicate to the Committee that the 11 ended up (quite legally) paying no tax primarily through extensive use of property based capital allowances. However I also want to make it clear that other factors included ordinary trading losses or business losses and charitable donations.
High Earners Study
The Committee will be aware that in 1997 and again in 2002 Revenue conducted
studies of the effective tax rates of the top 400 earners based on the
tax years 1993/4 and 1994/5 (1997 study) and tax year 1999/2000 (2002
study). We are in the process of completing a similar study based on the
tax year 2001. The 2002 study indicated that, between tax years 94/95
and 99/00, there had been an increase in the effective tax rate of high
earners. While the current study is not yet complete it would appear that
this trend has continued. This indicates that measures such as the capping
in 1998 of capital allowances available to passive investors are gradually
having the desired effect. We expect that the study will be completed
shortly and presented to the Minister for Finance. The earlier studies
were placed in the Oireachtas Library.
Revenue activity
The general matters under discussion here today - use of reliefs
and incentives, residency for tax purposes and effective rates of tax
for high earners - are all matters in which Revenue takes a very
keen interest as part of our responsibility for tax administration and
particularly tax compliance.
In restructuring our organisation over the past few years we have had a particular focus on more effective policing of these areas. Many, though not all, of the individuals or entities whose tax affairs are entwined with such allowances or exemptions now fall within the remit of our Large Cases Division and I have given the Committee detailed briefing on the approach that is adopted by that Division in doing its work.
Revenue has put enormous effort in recent years into building a tax compliant culture in this country. We have made progress but we still have some way to go. It’s our business to apply the law effectively and fairly. Any perception to the contrary at best makes some compliant taxpayers resentful or at worst encourages them to consider evasion. No doubt similar considerations apply to the structure of the tax system itself and the validity of reliefs.
Thank you Chairman